But business groups say new rule 'sets a dangerous precedent'
The U.S. Federal Trade Commission (FTC) has announced that it has issued a final rule that will be banning non-competes across the country in order to promote competition, protect the freedom of workers in changing jobs, increase innovation, and foster the creation of new businesses.
Lina Khan, chair of FTC, stated that the banning of non-compete clauses will help in the creation of more than 8,500 new startups ever year.
“The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market,” said Khan.
The FTC also expected that its final rule will lead to higher earnings for the average worker of $524 per year, while also decreasing the costs of healthcare by $194 billion in the next 10 years. It also expected that the final rule will help in driving innovation and lead to an increase in patents ranging from 17,000 to 29,000 over the same time period.
Non-competes impose contractual conditions which serve as a hindrance to workers from being able to take on a new job or begin a business of their own.
The rule, first proposed in January 2023, will take effect in August. Companies with existing noncompete agreements would be required to end them and to inform employees that they will not be enforced.
With the new rule, non-competes will no longer be enforceable for the majority of workers. While existing non-competes for senior executives will be able to remain, employers will not be able to enforce any new non-competes.
“Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any non-competes against them,” the FTC said in their statement.
Despite the ban, employers have alternatives such as trade secret laws and non-disclosure agreements (NDAs). The FTC also said that if employers wanted to retain employees without using non-competes, they can improve their wages as well as their working conditions.
But the FTC’s two Republican commissioners, Melissa Holyoak and Andrew Ferguson, said federal law does not allow the commission to adopt broad rules prohibiting conduct that it deems anticompetitive, according to Reuters.
“We are not a legislature,” Ferguson said. “I do not believe we have the power to nullify tens of millions of existing contracts."
Major business groups representing an array of industries have also criticized the rule, saying non-competes are a crucial way for companies to protect trade secrets and that they promote competitiveness, said Reuters, and the U.S. Chamber of Commerce said that it will also file a legal challenge to the rule.
"This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy," said Suzanne Clark, president and CEO.
